Working Paper: CEPR ID: DP12900
Authors: Matthijs Breugem; Adrian Buss
Abstract: We study the joint portfolio and information choice problem of institutional investors who are concerned about their performance relative to a benchmark. Benchmarking influences information choices through two distinct economic mechanisms. First, benchmarking reduces the number of shares in investors' portfolios that are sensitive to private information. Second, benchmarking limits investors' willingness to speculate. Both effects imply a decline in the value of private information. Hence, in equilibrium, investors acquire less information and informational efficiency declines. As a result, return volatility increases and benchmarking can cause a decline in equilibrium stock prices. Moreover, less-benchmarked institutional investors outperform more-benchmarked ones.
Keywords: benchmarking; institutional investors; informational efficiency; asset allocation; asset pricing
JEL Codes: G11; G14; G23
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Benchmarking (C52) | Reduced Sensitive Shares (G12) |
| Benchmarking (C52) | Limited Speculation (D84) |
| Reduced Sensitive Shares + Limited Speculation (G12) | Decline in Private Information Value (D89) |
| Decline in Private Information Value (D89) | Less Information Acquired (D83) |
| Less Information Acquired (D83) | Decline in Informational Efficiency (G14) |
| Decline in Informational Efficiency (G14) | Increased Return Volatility (G17) |